SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2000.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _____ TO _____
Commission File No. 1-935
QUESTAR GAS COMPANY
(Exact name of registrant as specified in its charter)
STATE OF UTAH 87-0155877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 45360, 180 East 100 South, Salt Lake City, Utah 84145-0360
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 324-5555
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of July 31, 2000
Common Stock, $2.50 par value 9,189,626 shares
Registrant meets the conditions set forth in General Instruction
H(a)(1) and (b) of Form 10-Q and is filing this Form 10-Q with the
reduced disclosure format.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QUESTAR GAS COMPANY
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 68,174 $ 70,174 $ 268,694 $242,476 $ 476,155 $ 453,123
OPERATING EXPENSES
Natural gas purchases 35,779 36,741 158,209 135,463 280,011 256,404
Operating and maintenance 22,965 25,131 49,136 50,012 102,432 97,923
Depreciation 8,857 8,619 18,038 17,285 37,179 35,018
Other taxes 2,538 2,153 6,527 4,379 9,773 7,661
TOTAL OPERATING EXPENSES 70,139 72,644 231,910 207,139 429,395 397,006
OPERATING INCOME (LOSS) (1,965) (2,470) 36,784 35,337 46,760 56,117
INTEREST AND OTHER INCOME 684 1,466 1,113 1,971 2,122 3,509
DEBT EXPENSE (4,959) (4,743) (10,136) (9,848) (20,350) (19,944)
INCOME (LOSS) BEFORE
INCOME TAXES (6,240) (5,747) 27,761 27,460 28,532 39,682
INCOME TAXES (2,910) (2,911) 10,376 10,038 9,350 13,185
NET INCOME (LOSS) $ (3,330) $ (2,836) $ 17,385 $ 17,422 $ 19,182 $ 26,497
</TABLE>
See note to financial statements
<PAGE>
QUESTAR GAS COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1999
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and short-term investments $ 1,708
Accounts receivable $ 33,216 $ 29,117 83,098
Inventories 17,483 13,357 21,680
Purchased-gas adjustments 432
Other current assets 2,465 1,593 3,168
Total current assets 53,164 44,067 110,086
Property, plant and equipment 1,041,456 965,535 1,013,599
Less allowances for depreciation 440,158 401,343 421,111
Net property, plant and
equipment 601,298 564,192 592,488
Other assets 18,240 20,833 20,978
$672,702 $629,092 $ 723,552
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Checks outstanding in excess of
cash balances $ 2,296 $ 2,398
Notes payable to Questar
Corporation 46,000 5,600 $ 79,300
Accounts payable and accrued
expenses 42,648 42,259 69,122
Purchased-gas adjustments 3,301 1,453
Total current liabilities 94,245 51,710 148,422
Long-term debt 225,000 225,000 225,000
Other liabilities 1,321 1,582 1,394
Deferred income taxes and investment
tax credits 83,108 77,704 85,343
Common shareholder's equity
Common stock 22,974 22,974 22,974
Additional paid-in capital 81,875 81,875 81,875
Retained earnings 164,179 168,247 158,544
Total common shareholder's
equity 269,028 273,096 263,393
$672,702 $629,092 $ 723,552
</TABLE>
See note to financial statements
<PAGE>
QUESTAR GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION> 6 Months Ended
June 30,
2000 1999
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,385 $ 17,422
Depreciation 19,736 18,646
Deferred income taxes and investment
tax credits (2,235) (2,319)
34,886 33,749
Change in operating assets and
liabilities 34,706 40,342
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 69,592 74,091
INVESTING ACTIVITIES
Capital expenditures (28,580) (19,960)
Proceeds from disposition of
property, plant and equipment 34 2,745
NET CASH USED IN INVESTING
ACTIVITIES (28,546) (17,215)
FINANCING ACTIVITIES
Checks outstanding in excess of
cash balances 2,296 2,398
Decrease in notes payable
to Questar Corporation (33,300) (91,100)
Capital contribution 40,000
Payment of dividends (11,750) (11,500)
NET CASH USED IN FINANCING
ACTIVITIES (42,754) (60,202)
DECREASE IN CASH AND
SHORT-TERM INVESTMENTS $ (1,708) $ (3,326)
</TABLE>
See note to financial statements
<PAGE>
QUESTAR GAS COMPANY
NOTE TO FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements reflect all adjustments
which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods
presented. All such adjustments are of a normal
recurring nature. Due to the seasonal nature of the
business, the results of operations for the three- and
six-month periods ended June 30, 2000, are not
necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For
further information refer to the financial statements and
footnotes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
QUESTAR GAS COMPANY
June 30, 2000
(Unaudited)
Operating Results
Following is a summary of financial and operating
information for the Company:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL RESULTS - (dollars
in thousands)
Revenues
From unaffiliated customers $ 66,957 $ 69,952 $ 266,484 $242,045 $ 472,045 $ 451,742
From affiliates 1,217 222 2,210 431 4,110 1,381
Total revenues 68,174 70,174 268,694 242,476 476,155 453,123
Natural gas purchases 35,779 36,741 158,209 135,463 280,011 256,404
Margin $ 32,395 $ 33,433 $ 110,485 $107,013 $ 196,144 $ 196,719
Operating income (loss) $ (1,965) $ (2,470) $ 36,784 $ 35,337 $ 46,760 $ 56,117
Net income (loss) (3,330) (2,836) 17,385 17,422 19,182 26,497
OPERATING STATISTICS
Natural gas volumes (in thousands of
decatherms)
Residential and commercial sales 9,197 14,145 43,105 46,570 78,736 82,309
Industrial sales 2,047 2,282 5,251 5,222 9,852 9,806
Transportation for industrial
customers 13,865 11,800 27,882 25,151 54,374 52,665
Total deliveries 25,109 28,227 76,238 76,943 142,962 144,780
Natural gas revenue (per decatherm)
Residential and commercial $ 5.93 $ 4.15 $ 5.52 $ 4.65 $ 5.31 $ 4.88
Industrial sales 2.99 2.83 3.16 2.93 3.07 3.01
Transportation for industrial
customers $ 0.11 $ 0.13 $ 0.12 $ 0.13 $ 0.12 $ 0.13
Heating degree days
Actual 492 946 2,845 3,242 4,920 5,413
Normal 741 741 3,484 3,484 5,801 5,801
Colder (Warmer) than normal (34%) 28% (18%) (7%) (15%) (7%)
Number of customers at June 30,
Residential and commercial 686,827 665,221
Industrial 1,352 1,356
Total 688,179 666,577
</TABLE>
Questar Gas experienced a seasonal loss of $3.3 million
in the 2000 period. In the comparable year-earlier
quarter, the utility recorded a $2.8 million loss. The
Company continued to see the impact of costs associated
with strong customer growth and lower usage per customer.
Questar Gas addressed these issues in a general rate case
order received August 11, 2000 and discussed below.
Questar Gas' margin decreased 3% in the second quarter of
2000 when compared with the second quarter of 1999. The
lower margin was due primarily to a timing difference
caused by a change in procedure for recording gathering
costs. Gathering costs are recognized on a straight-line
basis where before the costs were seasonal. The
regulatory procedure did not increase gathering costs
from year to year. The margin was slightly higher in the
first half of 2000 compared with 1999. The higher margin
was the result of interim rate relief which more than
offset higher costs including costs of carbon dioxide
removal.
The PSCU granted Questar Gas' request for $7.1 million of
interim rate relief, subject to refund, effective January 1,
2000. On August 11, 2000, the PSCU issued a final order which
granted $13.5 million in general rate relief and authorized a
return on equity of 11 percent. The $13.5 million increase
includes the $7.1 million of interim rate relief and allows the
collection of $5 million annually for carbon dioxide processing
costs. The Company will be allowed to collect the full amount
of the increase in its rates immediately upon the filing of
tariff provisions. The number of customers served by Questar
Gas grew by 21,602 or 3.2% from a year ago to 688,179. The
number of customer additions for the year ending December 31,
2000 is expected to be between 20,000 to 21,000.
Volumes delivered were 11% lower in the second quarter
and 1% lower for the first half of 2000 when compared
with the same periods in 1999. The decrease was due to
warmer weather in 2000 when compared with 1999.
Temperatures were warmer than normal for all periods
presented in 2000. The effects of warmer weather were
mitigated by the weather normalization adjustment.
Questar Gas' natural gas purchase costs increased in the
six-and twelve-month periods of 2000 when compared with
the 1999 periods due to higher commodity costs.
Commodity rates for the first half were $2.23 per Dth in
2000 and $1.72 per Dth in 1999. Gas purchases were lower
in the second quarter because of lower gas sales volumes.
The Company files for adjustment of purchased-gas costs
with the Utah and Wyoming Public Service Commissions on a
semiannual basis.
Operating and maintenance expenses decreased in the
three- and six-month periods ended June 30 when compared
with the same periods in 1999. The decrease was due
mainly to lower information-technology costs which were
partially offset by the higher costs associated with
strong customer growth and increased costs for the
collection of receivables. Depreciation expenses were
higher in the second quarter and first half of 2000 as a
result of investment in property, plant and equipment,
particularly technology related which has a shorter
useful life. Other taxes increased in the three- and
six-months comparisons because of a current year
adjustment of prior year taxes.
Gains from the sales of surplus properties added to
earnings in the second quarters of both 2000 and 1999.
However, the gain in 2000 was $649,000 smaller than the
1999 gain.
The effective income tax rate for the six month period
was 37.4% in 2000 and 36.6% in 1999. The Company
realized $916,000 of tight-sands gas-production credits
in the 2000 period and $939,000 in the 1999 period
causing a decrease from an expected 38% effective income
tax rate.
Liquidity and Capital Resources
Operating Activities
Net cash provided from operating activities in the first
six months of 2000 was $4,499,000 less than was generated
in the same period of 1999. The decrease in cash flow
resulted primarily from less cash generated from the
changes in operating assets and liabilities. A
tight-sands gas-production tax credit carryover amounting
to $4.1 million and a $2 million overpayment of federal
income taxes in 1998 were applied toward 1999 tax
payments.
Investing Activities
Capital expenditures were $28.5 million in the first half
of 2000. Capital expenditures for calendar year 2000 are
estimated at $63.3 million.
Financing Activities
Cash generated from operating activities was used to fund
capital expenditures, repay loans to Questar and pay
dividends. Loan balances owed to Questar as of June 30,
amounted to $46 million in 2000 and $45.6 million in
1999. Capital expenditures for the remainder of 2000 are
expected to be financed with net cash flow provided from
operating activities and borrowings from Questar.
Regulatory Matters
Questar Gas filed a general rate case December 17, 1999
requesting approximately $22 million of general rate
relief. Higher costs of serving customers, inclusion of
charges for the removal of carbon dioxide from part of
the gas supply and lower gas usage per customer were
among the reasons for requesting rate relief. The PSCU
issued a final order on August 11, 2000 which granted
$13.5 million of annualized rate relief and approved an
11% return on equity. The $13.5 million includes the
$7.1 million interim rate relief and $5 million of annual
carbon dioxide processing costs.
Revenue Recognition Guideline Issued by the Securities
and Exchange Commission (SEC)
In December 1999, the SEC issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements." The SAB raised issues concerning the timing
of recording revenues given that sales transactions may
contain some conditions allowing customers to return
products or receive refunds. The effect of adopting this
accounting guideline is not known at this time because
the Company has not completed its evaluation. The SEC
has postponed the effective date of this ruling from the
second quarter of 2000 to the fourth quarter.
Forward-Looking Statements
This 10-Q contains forward-looking statements about
future operations, capital spending, regulatory matters
and expectations of Questar Gas. According to
management, these statements are made in good faith and
are reasonable representations of the Company's expected
performance at the time. Actual results may vary from
management's stated expectations and projections due to a
variety of factors.
Important assumptions and other significant factors that
could cause actual results to differ materially from
those discussed in forward-looking statements include
changes in: general economic conditions, gas prices and
availability of gas supplies, competition, regulatory
issues, weather conditions and other factors beyond the
control of the Company. These other factors include the
rate of inflation and adverse changes in the business or
financial condition of the Company.
These factors are not necessarily all of the important
factors that could cause actual results to differ
significantly from those expressed in any forward-looking
statements. Other unknown or unpredictable factors could
also have a significant adverse effect on future results.
The Company does not undertake an obligation to update
forward-looking information contained herein or elsewhere
to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking
information.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
a. On August 11, 2000, the Public Service Commission of Utah
(the "PSCU") issued an order in the general rate case filed by
Questar Gas Company ("Questar Gas" or the "Company"). See the
Company's Form 10-Q Report for March 31, 2000, Item 1. Legal
Proceedings. Specifically, the PSCU granted $13.5 million in
general rate relief and approved a return on equity of 11
percent. (The $13.5 million includes the $7.1 million in
interim rate relief that Questar Gas was authorized to collect,
subject to refund, effective January 1, 2000.) To reach its rate
increase figure, the PSCU adopted the stipulation that was entered
into by the Company and the Division of Public Utilities (the
"Division") that allows Questar Gas to collect $5 million of
annual carbon dioxide ("CO2") processing costs. The PSCU's order
authorizes the Company to reflect the full amount of the increase
in its rates effective immediately upon the filing of tariff
provisions.
The Company originally requested a general rate increase of
$22.2 million and a return on equity of 12 percent. Prior to the
public hearings that were held in June before the PSCU, Questar Gas,
the Division, and the Committee of Consumer Services settled on
all revenue requirement issues except return on equity, postage costs
allocated to affiliates, and the CO2 costs. The stipulations, when
coupled with decisions to be made by the PSCU on the contested issues,
produced a range of potential outcomes from $7.2 million to $17.8
million.
b. Questar Gas, on May 31, 2000, filed a semi-annual
application with the Public Service Commission of Wyoming (the
"PSCW"), requesting permission to reflect annualized gas costs of
$11,134,000 in rates for Wyoming customers effective July 1, 2000.
The pass-on filing reflected slightly lower commodity costs to core
customers and higher commodity costs to interruptible sales
customers. The PSCW authorized the Company to reflect the request
in rates effective July 1, 2000.
c. On June 14, 2000, Questar Gas filed a semi-annual
pass-through application with the PSCU, seeking approval to reflect
annualized gas costs of $286,612,760 in rates for Utah customers
effective July 1, 2000. The application reflected a slight decrease
in commodity costs for general service customers and a significant
increase in commodity costs for interruptible sales customers. In
its application, Questar Gas emphasized that approximately one-half
of its gas supply for general service customers comes from
Company-owned wells and warned that it may be required to request
coverage for higher costs later in the year if the price of
purchased gas continues at record high levels. The Division
recommended that the Company be authorized to adjust its rates for
interruptible sales customers, but not be authorized to reflect
lower prices for general service customers. Questar Gas did not
oppose this recommendation. The PSCU, by an interim order,
authorized the Company to adjust its rates effective July 1, 2000
consistent with the Division's recommendation.
d. The Company and the PSCU have both filed briefs with the
Supreme Court of Utah in the appeal taken by Questar Gas of the
PSCU's decision denying its application to reflect certain
gas-processing costs in its pass-through application. See Questar
Gas's Form 10-K Report for 1999, Items 1 and 2. Business and
Properties, "Regulation." The Company, in its brief, argued that
the CO2-processing costs are costs that are eligible for
pass-through treatment under Utah's statutory provisions and the
PSCU's regulatory precedents. Questar Gas also claimed that the PSCU
can take necessary action to deal with special items outside general
rate cases.
After denying the Company's application to reflect the costs in
its pass-through applications, the PSCU granted interim rate relief
in Questar Gas's general rate case application of $7.065 million,
which is equal to the approximate amount of the annual disallowance
for CO2 processing costs, effective January 1, 2000. The Company's
appeal involves the 1999 costs that it was not allowed to recover.
No hearing date has been set for oral argument before the Supreme
Court.
Item 5. Other Information.
Effective August 1, 2000, David M. Curtis, age 45, was
appointed to serve as Controller for Questar Gas and its affiliates
in the Regulated Services unit. Mr. Curtis, as Controller, is the
Company's primary accounting officer; he has over 17 years of
service with the Company and its affiliates. He replaces Mr. Glenn
H. Robinson, who was named to serve as an executive officer of
Questar Corporation, the Company's parent, as of August 1, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
QUESTAR GAS COMPANY
(Registrant)
August 14, 2000 /s/ D. N. Rose
D. N. Rose
President and Chief Executive Officer
August 14, 2000 /s/ S. E. Parks
S. E. Parks
Vice President, Treasurer, and
Chief Financial Officer
